Ask Margaret: Can I claim my unit as an investment if I move out?

Hi Margaret,

Can I move out from my own unit and rent a bigger place to live and claim my unit as an investment unit?

Kind regards,

Ramin

See Margaret Lomas' answer on the next page.

Hi Ramin,

You can move out of your principal place of residence, rent out your former home and claim all expenses and interest costs as a tax deduction as soon as it becomes available for rental, and as long as you also declare the income you receive. 

If you don’t have another property that you can apply your principal place of residence exemption to (for example, if you rent where you live) then you can have up to six years exemption from capital gains tax too, at the end of which you will need to either move back in, or sell.

Whether you should rent it out or not is another thing entirely.  Here are some things to consider:

1. If the loan on your home is presently quite low, and the one on any new family home you intend to buy is larger, then potentially you might be upside down from a financial perspective.  As your own home is non- deductible, then the interest repayments might be a high, non- deducible amount while those on your newly created investment property would be low, and a taxable profit situation may result. In this case it may be better to sell the family home while it is still capital gains tax free, use the proceeds to buy your new home with a low loan, and then use the equity to get a fully deductible loan to buy an investment property elsewhere.
   
   
2. It’s rare that people happen to live in an up and coming hotspot – therefore keeping the current home may not be the best investment.  It’s easy to think that you live in a great area but the reality is that it might not have the fundamentals required to perform well from both a yield and growth perspective.  Therefore, keeping it becomes an opportunity cost or not buying a better investment in a better performing area.
   
   
3. It can be very difficult to watch a tenant move into a home that was once your pride and joy.  It’s a fact that it simply won’t be treated how you want it to, and your emotional attachment may make you a bad landlord!

I have rarely seen the best option being to keep a former Principal Place of Residence. At this stage you need some good advice from a qualified property investment adviser who can help you make this decision as a part of a complete strategy which considers all of your financial and investing needs, rather than just this single, short term decision.

Regards,

Margaret

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